Common sense dictates that when you need information or advice on
something you're unfamiliar with, you consult with a professional. That's
what people do, whether refinancing a home, choosing an insurance product, or
fixing a broken heater. While professionals certainly have their own agendas,
they still know more about their products or services than others, and can at
least help them make more informed decisions.
Bank and brokerage analysts know their products, too. But when it
comes to helping you make an informed decision about where the gold market is
headed, they have, as Rick Rule is fond of saying, a record unblemished by
Every year major banks and brokerage houses provide their four-year
forecasts for the gold price. The following chart documents the average price
projection of 25 top analysts over the past seven years, many of whom
specialize in the resource industry. I might suggest pushing away from your
desk so that when your jaw drops it doesn't hit the keyboard.
(Click on image to enlarge)
You can see that every year since 2007, bank and brokerage analysts
have as a group predicted that gold would fall, sometimes dramatically, over
the next four-year period. For example, in 2007 the consensus of all
estimates was that gold would decline from $656 to $523 by 2011. Instead, the
price rose 140% to an average of $1,572 that year.
Similarly, they predict this year that gold will fall from $1,665 to
$1,515 by 2017. Even if they thought gold would move higher the first year,
their best guess was that it was ultimately headed lower. So far they've been
wrong every time.
For the most part, these are analysts who do nothing but study the
resource markets all day long. It's their job. No one gets it right all the
time, but this kind of track record is embarrassing.
The obvious lesson is for investors to ignore price predictions from
the major banks and brokerage houses – they just don't get it. I'm sure most
readers of this publication already know that.
However, there's a much bigger implication of this data that may not
immediately come to mind…
- Why would I as a fund manager
or institutional investor buy a gold stock if my analysts tell me the
price of gold is going to fall?
Answer: I wouldn't.
If the price of the product a company sells is expected to decline
over the next few years, would you buy the company's stock? Its earnings are
almost certain to fall. As a manager of millions (or billions) of dollars,
you wouldn't buy any
investment with this kind of outlook.
There's more. These same banks and brokerages have also been
predicting the price of oil will rise (almost) every year. While they've
occasionally been right about that, it means that margins for the gold
producers would be expected to fall, since roughly 10% of their costs are
related to fuel. So again…
- Why would I as a fund manager
or institutional investor buy a gold stock if my analysts tell me profit
margins are expected to fall?
Answer: I wouldn't.
It doesn't matter that analysts have been consistently wrong. What
matters is that if the institutional world believes the gold price is likely
decline and/or that margins are likely to fall, they're not going to stick
their necks out and buy gold stocks. They could lose their bonuses or even
their jobs if their analyst's predictions came true and they'd bet against
This could be the explanation for why hedge funds, institutional
investors, and other large investors haven't entered this market en masse and
could account for the disconnect between the price of gold and the trajectory
of gold stocks.
institutional investors are largely absent from this market, why is gold
rising every year? Gold is not a trading sardine for institutions. Gold is
supported by strong physical demand from individuals around the world and
from central banks. Read our take here.
We see the potential in gold equities, as we believe the price of gold
is going higher, but big investors with billions of dollars to pour into an market don't. Their money, for the most part, is still on
This phenomenon leads us to predict that someday these institutional
enter this sector en masse. Once the facts sink in and the institutional
world becomes convinced gold and silver prices will maintain a sustainable uptrend,
they'll be much more attracted to the equities – and just as stubborn about
changing their minds once they're on board.
Now, it's possible this group may have to be beat over the head by
relentlessly by rising precious-metals prices before they enter the industry.
They'll have to believe that, say, gold hitting $1,900 again isn't a
temporary fluke but a sustainable uptrend. I don't know what price the metal
would have to maintain or how long it would have to stay there before they
jump on board, but given the above chart, I think it's safe to say they won't
be the first to the party. I personally think it will be something along the
lines of what we outlined in the recent Hard Assets Alliance letter.
Whenever and however it happens, though, the stampede from
institutional investors into this tiny industry will be sudden and dramatic,
because they tend to have a herd mentality. No one wants to be left behind.
Just like they don't want to risk buying something all their colleagues are
ignoring now, they'll rush to own the popular and exciting investment when
gold stocks have their day.
The consequence of this will result in dramatically higher stock
prices. How high? Well, this group loves to use price models, and fair value
for Newmont Mining (NEM), based on its Reserves, would be about $200/share
(it's currently trading around $44). And that's at $1,700 gold – as the spot
price rises, the value of NEM will rise
exponentially, since gold would be rising faster than costs, even when
inflation kicks in.
That is why I'm excited about the producers. It's the
first place the institutional world will turn when gold makes a sustained
move higher. Come the day those investors believe gold is about to become
part of the monetary system, that bonds are no longer a safe place for money,
that inflation is about to get out of control, or whatever it might be that
changes their paradigm, they'll flood into our little market and push share
prices higher by an order of magnitude.
When this shift gets under way, we'll already own the stocks that
institutional investors will be clamoring to buy.
Maybe we should thank them now.
Gold and Silver HEADLINES
Germany to Bring Home 674 Tonnes
of Its Gold Reserves (Mineweb)
Germany's Bundesbank has announced it will
bring back home some of its gold reserves currently stored in the United
States and France. It will transfer to Frankfurt 374 tons (12 million ounces)
of gold from Banque de France in Paris and 300 tonnes (9.6 million ounces) from the Federal Reserve in
Germany began storing its gold reserves "as far to the west and
as far from the Iron Curtain as possible" during the Cold War era.
Currently more than two-thirds of the country's gold reserves of nearly 3,400
tonnes (109 million ounces), valued at 137 billion
euros or US$183 billion, are stored abroad in vaults in New York, Paris, and
London. The goal of the German government's new policy is to house more than
50% of the country's gold in Bundesbank vaults in
Frankfurt by 2020.
Is this a breakdown in trust between central banks? Time will tell,
but the implications of this action contradict Ben Bernanke's statement that
gold is held by central banks for the sake of tradition. Central bankers in
Germany clearly think that gold is very relevant in today's financial system.
The lesson for investors is the same as it is for Bundesbank:
store some gold far off in case of local trouble, but keep some of your gold
close to home, in case you need it.
Gold Prices to Peak in 2013: GFMS Survey (Mining.com)
In the latest release of Thomson Reuters' GFMS Gold Survey, the
company says that it expects 2013 to be a good year for gold. Among the main
supportive factors that will return to the fore are loose monetary policies
in major economies, ultralow short-term interest rates, rising longer-term
inflation expectations, robust purchases from official sectors, and others.
The survey forecasts that gold prices will continue to increase, with
an average price of more than $1,800 per ounce over the first half of 2013.
While we agree with the catalysts for a rising gold price, we'll take
the other side of the bet that it peaks this year. Not until worldwide
money-printing schemes cease, the dollar is a healthy currency, and
politicians become responsible with their spending will the gold bull end –
and we don't see those things changing this year.
Gold Visualized in Bullion Bars (Demonocracy.info)
This infographic shows how little physical
gold the world possesses. All of the gold ever mined in history weighs
approximately 166,500 tonnes, which is a lot in
terms of mass, but this amount in size, if all piled together, would be
equivalent to a modest office building.
Slightly over half (84,200 tonnes or 50.5%)
of all the world's gold is used in jewelry. Another 31,000 tonnes (18.7%) is held by private investors, with another
29,000 tonnes (17.4%) held by the world's
This Week in International
Speculator and BIG
GOLD – Key Updates for Subscribers
- One of our silver producers released its Q3
2012 operational update. We like the numbers very much – and you will,
too. Read our analysis